Active ETFs, activism on Vanguard agenda

Vanguard could soon start offering exchange-traded fund (ETF) versions of its actively-managed products on the US stock exchange following regulatory approval last week.

According to a Reuters report, the US Securities and Exchange Commission (SEC) said on Friday it would approve a Vanguard application to offer the ETFs in a move analysts labelled “a potential game-changer” for the US active management market.

The report says if Vanguard does roll out active ETFs in the US – it already offers some listed in Ireland and Canada – that could “increase competition and push down costs” in the already under-pressure actively-managed investment industry.

“Many active fund managers have been hesitant to launch ETF versions of their active funds fearing a requirement to disclose their portfolio holdings on a daily basis may reveal their investment strategies to potential copycat investors,” the Reuters release says. “The SEC said in the filing it would require Vanguard to disclose on its website the identities and quantities of the portfolio positions that would form the basis for the fund’s calculation of net asset value at the end of the day.”

Vanguard, the world’s second-largest fund manager with about US$4.5 trillion under management, also revealed late in August a more activist stance “investment stewardship” that would push firms harder on issues such as climate change and gender diversity.

“Our evolving position on climate risk (much like our stance on gender diversity) is based on the economic bottom line for Vanguard investors,” McNabb says. “As significant long-term owners of many companies in industries vulnerable to climate risk, Vanguard investors have substantial value at stake.”

McNabb, who will step down as Vanguard chief at the end of the year in favour of the group’s current CIO Tim Buckley, says over the previous 12 months Vanguard had exercised its proxy power in “171,000 discrete items” – about 14,000 more than the previous period.

“We are also discussing climate risk with company management and boards more than ever before,” the report says.

Vanguard recently joined the 30% Club, a group of investors committed to seeing at least one-in-three female board directors on every company.

The Vanguard stewardship report also details a number of corporate engagement case studies including with two Australian firms. According to the report, Vanguard hit up an Australian mining company over executive remuneration concerns and a materials firm “a fatal environmental disaster”.

‘Activist’ issues such as proxy wars and “contentious transactions” featured in 16 per cent of Vanguard’s corporate engagements over the previous 12 months, the report says.

McNabb says the group’s focus on corporate governance issues reflected its status as a long-term investor.

“Our index funds are structurally long-term, holding their investments almost indefinitely. And our active equity managers—who invest nearly $500 billion on our clients’ behalf—are behaviorally long-term, with most holding their positions longer than peer averages,” he says in the letter. “The typical dollar invested with Vanguard stays for more than ten years.”

As at the end of July Vanguard reported funds under management of US$4.5 trillion, of which more than US$3 trillion is sourced from institutions (compared to US$2 trillion two years ago). The global manager, which has a presence in NZ via a handful of KiwiSaver schemes and other wholesale vehicles, offers 371 products across more than 20 million underlying investors.